Corruption scandal threatening Brazilian economy

SAO PAULO, Brazil (AP) - An ongoing corruption scandal in Brazil is damaging South America's largest economy and derailing government efforts to put the nation on a path toward slow and sustainable growth, experts said Thursday. 

Brazil's economy will probably grow a meager 2.5 percent in 2005 - among the worst rates in Latin America and half last year's increase, said leading Brazilian economists at a Council of the Americas conference on making the country more competitive. 

High interest rates are responsible for part of the decline, but allegations the ruling Workers Party paid bribes to secure votes in Congress are also hurting Brazil's economy, they said. 

Investors have all but concluded that President Luiz Inacio Lula da Silva, his political clout crippled by the crisis, has virtually no chance of pushing through tax and labor reform legislation that would cut the cost of doing business in Brazil. That could hurt Brazil's economy next year, and possibly longer. 

"There's still a risk of the economy being contaminated by this crisis,'' Paulo Viera de Cunha, chief Latin American economist for HSBC Securities USA Inc., said at the conference. 

The crisis could also prevent Brazil from receiving an upgrade in its credit rating from Standard & Poor's, said Regina Nunes, the top Brazilian executive with the international rating agency. 

"We could be talking about an upgrade now if it hadn't been for the political crisis, but we have to live in reality,'' she said. 

However, S&P does not expect to actually change the credit rating for Brazil until next year's presidential elections, barring some unforeseen crisis or unexpected progress on reforms aimed at reducing Brazil's mammoth debt, said Jane Eddy, S&P's managing director for Latin America. 

Silva is battling allegations his party was involved in multimillion-dollar bribery scandals, buying votes and negotiating loans and kickbacks with advertising agencies and state-owned companies. 

A number of government-appointed executives at state companies and pension funds have stepped down since the scandal broke in June, as have top leaders in the Workers Party. While Silva has remained relatively unscathed so far, experts say the scandal could wreck his chances for re-election. 

In the latest blow, the head of Brazil's National Mint - which prints Brazil's currency - resigned Wednesday amid allegations he received 2.6 million reals (US$1.3 million, euro916,000) in payoffs. 

Hours before the resignation of Manoel Severino dos Santos, Silva defiantly struck back at critics who have said he should be impeached or decide not to run for re-election to avoid being pummeled at the polls next year. 

"Love me or hate me, they're going to have to put up with me, because that's going to be the will of the people,'' he said in an emotional speech in the northeastern Brazilian town where he grew up destitute, the son of a dirt-poor sharecropper. 

Experts at the conference said Brazil's economic fundamentals are strong, and that investors remain pleased Silva has stuck to orthodox monetary policy despite months of relentless political pressure that initially sparked fears he might turn to populist economic policies analysts say the country can't afford. 

Central Bank President Henrique Meirelles did not directly answer a question about the impact of the scandal on risk for investors in Brazil, but said the country's commitment to sound monetary policy is supporting an economy that was previously more vulnerable to political scandals. 

"Brazil is reducing many factors that used to cause periodic crises, and is creating conditions needed for the country to grow,'' Meirelles said. 

But experts stressed the political crisis has made it more difficult to predict when Brazil will be able to improve key areas like education, fix the country's crumbling infrastructure and create millions of new jobs in the country of 182 million. 

"I don't see more clarity before elections in 2006, which then will take us into the new administration in 2007,'' Cunha said. 

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